These Two Major Issues Are A Threat To Stablecoins

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StableCoin Threats

On the back of newly released commentary from the published correspondence between Securities and Exchange Commission (SEC) chairman Jay Clayton and representative Ted Budd, SEC senior advisor Valerie Szczepanik explained at Austin's SXSW forum that stablecoins might be breaching existing securities laws.

Stablecoins May Live in the Land of Securities

Throughout the last two years, stablecoins have emerged as an extremely hot topic while growing into sought-after vehicles for hedging against the volatility attached to cryptocurrency markets. Tether (USDT) has been ruler of the stablecoins for some time, and in recent times made headlines for an alteration to the company's website. The change caused turbulence within the cryptocurrency community because rather than confirming that each Tether is backed by one USD, the terms were greatly revised.

“Every tether is always 100 percent backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities,” the website presently reads.

Valerie Szczepanik

Following Tether’s recent website update, on March 15, SEC senior advisor Valerie Szczepanik continued on that as a result of the inherent nature of stablecoins, the tokens could “raise issues under securities laws.” Szczepanik mentioned that stablecoins are broken down into categories which can include tethering the tokens to “some real asset, like real estate or gold and oil — Coins tied to a fiat currency held in reserve, and a third category that could become problematic under the law.” The SEC advisor added while on stage at SXSW: “I’ve seen stablecoins that purport to control price through some kind of pricing mechanism, whether it’s tied to the issuance, creation or redemption of another type of digital asset tied to it, or whether it is controlled through supply and demand in some way to keep the price within a certain band.”

Szczepanik continued:

It’s these kinds of projects where there is one central party controlling the price fluctuation over time that might be getting into the land of securities.

The latest statements from the SEC senior advisor and chairman Jay Clayton's statements recently could very well mean that stablecoins fall into the security category. Stablecoins, no matter whether they are upheld by reserves contained a bank, or use the over-collateralization method favored by the Maker network, are effectively promises. Skeptics disagree with claimed tether (USDT) reserves because they feel that the corporation has struggled to prove its backing. Tether's recent website change elicited popular finance writer Frances Coppola to write: “Tether's U.S. dollar peg is no longer credible,” in a seething assessment.

Coppola’s assessment continued:

Perhaps crypto enthusiasts should read up on the fate of Reserve Primary Fund in 2008. Or perhaps Venezuela — After all, an exchange rate peg only holds until the reserves run out.

A Crypto Flash Crash Scenario Could Put a Heavy Strain on Stablecoins

Other types of stablecoins are based on promises as well and a few have the stamp of U.S. regulators for them to make the undertaking more powerful. Trusttoken (TUSD) has sought to tackle transparency by allowing TUSD owners a “real-time view” of the company's reserves. According to the Trusttoken team, accounting firm Armanino has developed a platform that makes it possible for users to authenticate the TUSD dollar collateral. Dai has over-collateralization, so there's some safety net there, but critics think that if the price of ethereum (ETH) plunged in a flash, the stablecoin would have problems except if the team sold the collateral fairly quickly.

A flash decrease in overall fiat value within the cryptoconomy really puts a strain on stablecoins and when bitcoin and a few other digital assets dropped significantly in value last October this was rather noticeable. The belief that stablecoins can hold their stability would truly be put to the test if there was a flash crash throughout the crypto markets.

Tether Charts

Much like their fiat relatives, all stablecoins are only as good as their promises and a flash crash and serious lack of liquidity could inevitably ruin digital promissory notes. On October 15, when the cryptoconomy jittered with yet another price crash, tether (USDT) dipped below the $1 mark. Having said that, despite concerns over coins like tether, Szczepanik affirmed at SXSW that “algorithmic stablecoins” raise the most issues because there is a lack of any genuine collateral.

“You’re talking about folks who are buying into that ecosystem, or are buying this coin, with the expectation that somebody else is going to be holding a profit, or guaranteeing a profit or holding the price at a certain level. Again, that could raise issues under securities laws.”

Stablecoins Face a Future That Falls Under Securities Laws

Currently, stablecoins are confronted by some significant hurdles and a couple of major issues. One is the assurance to uphold constant stability and liquidity particularly in the middle of a big market crash. The other issue is whether stablecoins, whose legal status is presently being questioned, will successfully pass the scrutiny of regulators. Stablecoin startup Basis recognizes these hazards only too well as the corporation was forced to close operations in December because of fears its product would be deemed a security.

“Folks like to put labels on things, but we’ll always look behind the label to see exactly what’s happening,” Szczepanik said. “So you can call it a utility coin, call it a stablecoin, call it a consumptive coin or some other coin — We’re [SEC] going to look at the characteristics.”

What do you think about the issues that stablecoins face in the future? Let us know what you think about this subject in the comments section below.

Disclaimer: This article is for informational purposes only. Bitcoin.com does not endorse or support any stablecoin and its affiliated companies. Readers should do their own due diligence before taking any actions related to the mentioned companies, creators, associates, or any of its affiliates or services. Bitcoin.com and the author are not responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.


Image credits: Pixabay, Bitcoin.com, Shutterstock, and various stablecoin logos.


The post Stablecoins Are Threatened by These Two Major Issues appeared first on Bitcoin News.

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